What impact did Labour's first budget have on markets?

The UK economy showed mixed signals last week, with key developments impacting market expectations. The budget delivered by Rachel Reeves, which included a £70 billion spending boost, led to predictions of a shallower rate-cutting cycle by the Bank of England (“BoE”). A Reuters poll indicated economists largely expect a cautious BoE approach, with rates potentially reaching 3.5% by the end of 2025. Job vacancies in London continued to lag, sitting 25% below pre-pandemic levels, partly due to the rise in hybrid work and lower demand for retail roles. Shop prices declined by 0.8% year-on-year, hinting that inflation could stay below the BoE's 2% target. Meanwhile, full-time pay rose 6.9% annually, with the strongest gains in hospitality and customer service roles. The UK manufacturing Purchasing Managers' Index (“PMI”) slipped to a contractionary 49.9, reflecting slower growth and stretched supply chains.

Labour’s first budget in fourteen years focused on increasing public spending to address deficiencies in Britain’s public services, with measures like a £40 billion tax rise, mainly targeting businesses through increased employer national insurance contributions. Despite International Monetary Fund (“IMF”) backing for the Labour government's tax-based deficit reduction approach, the budget sparked market concerns, with gilts and sterling selling off. The Office for Budget Responsibility (“OBR”) projected little change in long-term growth, at around 1.5%. Moody’s also warned that frequent adjustments to the UK's fiscal rules could weaken policy credibility, highlighting limited fiscal buffers for future shocks. With state spending now at 44% of gross domestic product (“GDP”), Reeves faces pressure to balance economic stability and potential future tax hikes if growth remains stagnant...

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